Editorial
Finance Companies: The same old story
View(s):That this country has suffered several rounds of finance company collapses is a published fact. Each time one falls, and thousands of families are left in the lurch, the role of the Central Bank of Sri Lanka (CBSL), which purportedly regulates these institutions, comes under intense scrutiny.
Industry experts have repeatedly highlighted the weaknesses of the non-banking financial sector, as it is called. Shortcomings in the CBSL’s regulatory function have been dissected, analysed, criticised and solutions proffered over the years. Depositors have suffered and shed copious tears — yet they been left high and dry. Various courtrooms have mulled over the details, including the shady business manoeuvres and the inflated asset values that make a mockery of the balance sheets of many of these companies.
Yet, it keeps happening. Central Investments and Finance Ltd (CIFL), with 6,000 depositors, is the latest to fall. The Central Bank is now awaiting depositor approval for a “restructuring plan” that will see 60 per cent of each investor’s capital converted into non-voting shares and the rest repaid in five years after a grace period of two years. A representative said some of the depositors are so old that they want their money sent to the other world.
This country has a sorry track record of finance company collapses; Mercantile Credit Limited in the late ’80s and, in the ’90s, Union Trust and Investment Ltd, House and Property Traders Ltd or HPT, Translanka Investments Ltd and Home Finance Limited. Pramuka Savings and Development Bank buckled in 2002, becoming the first bank in Sri Lanka to cave in.
Sakvithi Ranasinghe’s large-scale financial scam unravelled in 2008 leaving thousands from the lower income groups reeling, followed by the Golden Key Credit Card Company collapse later that year. Industrial Finance Ltd (IFL) also failed in 2008. And let’s not forget Danduwam Mudalali.
Some of these companies were not licensed by the Central Bank, but allowed to operate on the fringes of the law. Today, the industry knows that several finance companies of the 48 registered with the Central Bank are in distress. By no means did CIFL fall into dire straits overnight. Its balance sheets had indicated some years ago that something was not right. The Central Bank claims to study the reports of financial institutions more routinely than anybody else. Then, what excuse could the regulator offer for inaction earlier?
Industry experts say one reason could be that the Central Bank’s Department for Supervision of Non-Bank Financial Institutions is not geared to monitor such a large number of companies. Why, then, does the regulator keep licensing more of them (one more was granted a licence this year), despite pledging not to?
There’s more the media know than that is in print. They are confronted with a dilemma. Do they report the facts as they are and risk a run on these institutions that will precipitate their collapse or exercise restraint in informing the public of the pitfalls? Do they keep quiet in the hope that the situation will right itself? Or, do the media wait till a company crumbles and report the gory details after the fall? The last option — not the ideal one — was what happened in the case of CIFL to the detriment of the depositors.
Confidence is essential for the non-banking finance sector to thrive and the Central Bank is keen to stress this. An increasingly relevant question, however, is whether misplaced confidence serves any purpose in the long run.
There are similarities in the manner these financial institutions set themselves up for failure and, sometimes, for fraud. The Central Bank cannot be unaware of the modus operandi.
One method is for a group of companies to open up a registered finance company while running an unregistered finance company at the same time. They use the licensed institution as a front to mobilise deposits. They then funnel funds into the unregistered company and among other entities within the group with little or no accountability.
Then the siphoning begins — and grandiose self-aggrandisement follows — as they wallow in other people’s money.
It is relatively easy to set up a finance company. You can do it with Rs. 400 million and (they say) “a friend in the Central Bank”. This sum is negligible in today’s terms, but once such a company is floated, it has access to billions of rupees in terms of deposits, depending on how successful it is at convincing people to hand over their money. High interest rates are the bait. The Central Bank licence is consistently used in canvassing for customers. It is hard to blame the depositors for not scrutinising the balance sheets — the Central Bank’s ‘licence’ is their safety net.
The Central Bank now says criminal action will be instituted against the errant directors of CIFL under the Finance Business Act. Ironically, as the investigations show, the man behind the scam is not on the list of directors but ran the operation by proxy. What will the Central Bank do now? Has it been outwitted?
And how many directors of finance companies that failed in the past are serving jail terms? Their families are none the worse off today. They continue to live the good life; a few weeks in remand worth the price they have to pay. They don’t go by bus, surely as the depositors must. One more infamous than others is absconding abroad, or so they say, with hardly an effort by the Government to bring such parties to book.
Not only are implementers of the law lenient on the hotshots, in some instances the same players continue to run similar businesses. For instance, a former director of a finance company that failed in 2008 is now the chairman of another struggling, Central Bank-registered entity while its former general manager is chief executive/director.
The problems in this industry run deep. The Central Bank, for all its excuses, is found wanting in its role as the watchdog of the people’s purse. As the ordinary folks are left to ravenous wolves, partly due to their own misjudgement, nothing much seems to be done to the modren day Emil Savundranayagams who perpetrate these white collar crimes, seemingly, with impunity.
comments powered by Disqus